The Short- and Long-Term Impacts of Fashion Knockoffs on Original Items
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Marketing Science Institute Working Paper Series 2013 Report No. 13-108 The Short- and Long-term Impacts of Fashion Knockoffs on Original Items Gil Appel, Barak Libai, and Eitan Muller “The Short- and Long-term Impacts of Fashion Knockoffs on Original Items” © 2013 Gil Appel, Barak Libai, and Eitan Muller; Report Summary © 2013 Marketing Science Institute MSI working papers are distributed for the benefit of MSI corporate and academic members and the general public. Reports are not to be reproduced or published in any form or by any means, electronic or mechanical, without written permission. Report Summary The question if the U.S. should legally forbid the copying of original fashion designs (often labeled design piracy or knockoffs) is an ongoing active debate among legislators and industry advocacy groups, and in the legal academic literature, with some claiming that the benefits of knockoffs may outweigh their damage to the fashion industry. It has also drawn much attention in the global fashion market, as the use of quick imitation in designs has become a flourishing industry in various countries, and could be substantially affected by changes in the legal status of design piracy. Since 2006, seven separate bills that would protect fashion items from design piracy (mainly via a legal protection period, such as that instituted in the EU) were introduced in the U.S. Congress; however, none of them has been approved. Surprisingly, while marketing knowledge and formal approaches related to product growth and profitability are very relevant for this discussion, much of the debate has been based on anecdotes and conceptual arguments and not on empirical analysis of the financial consequences of design piracy. In this study, authors Appel, Libai, and Muller provide the first structured analysis of this important issue. They build a fashion diffusion model and use data on 15 fashion products from Google Trends, as well as published industry statistics, to calibrate it. Using simulations they can then examine the potential financial consequences of a knockoff on the original item, focusing on three main effects: acceleration, whereby the presence of a pirated design increases awareness of the design, and thus can have a possible positive effect on the sales growth of the original; substitution, the loss of sales to people who would have purchased the original design, and buy the knockoff instead; and uniqueness, the loss of sales that occurs when a design becomes more ubiquitous as a result of the knockoff. Three particularly notable findings emerge from analysis in this study: The overall knockoff effect. Taking into account the growth patterns examined, the entry of a knockoff has an overall negative effect on the financial performance of the original. In over 97% of cases, the combined harm due to substitution and uniqueness is greater than the positive effect of acceleration, with the net present value (NPV) going down 13% on average. These results support the concerns voiced by industry groups regarding the harm done by knockoffs. The role of need for uniqueness. Substitution is often emphasized as a means by which pirated goods cause direct harm to the profitability of originals, and acceleration has been highlighted as a potential positive effect of design piracy. Yet this study shows that both these effects may be dominated by loss of uniqueness, a factor that has been less emphasized in the context of the monetary influence of knockoffs. In the data ranges analyzed, on average, acceleration has a positive effect of about 9.5% on the profits of the original, substitution has a negative effect of 5.5%, and uniqueness has a negative effect of 18.1%. Loss of uniqueness continues to be the dominant effect even when consumers’ threshold levels are much higher than the levels inferred in this analysis. The role of time lag prior to knockoff entry. Given calls to protect original U.S. fashion articles via a legal protection period, similar to the case in the EU, the authors also examine the effect of Marketing Science Institute Working Paper Series 1 the duration of a protection period (i.e., a time lag between introduction of the original product and the entry of a knockoff) on the original product’s NPV. They find that short protection periods have little effect due to the opposing forces of uniqueness and acceleration. However, for longer periods (one year or more, in the ranges of the data), a positive effect begins to be observed, and it grows in an almost linear pattern as the protection period becomes longer. A legal protection period of three years, as proposed for the U.S., reduces harm to the NPV by about 44% and a period of five years reduces harm by about 73%. Gil Appel is a doctoral student in marketing, Guilford Glazer Faculty of Business and Management, Ben-Gurion University, Beer Sheva, Israel. Barak Libai is Associate Professor of Marketing, Arison School of Business, The Interdisciplinary Center, Israel. Eitan Muller is Professor of Marketing, Stern School of Business New York University, and Professor of Marketing, Interdisciplinary Center, Herzliya, Israel. Acknowledgments The authors would like to thank On Amir, Michael Haenlein, Liraz Lasry, and Irit Nitzan for their advice and help during the research process. Marketing Science Institute Working Paper Series 2 Introduction Consider Figure 1 (Figures follow References throughout), a photograph showing several apparel items manufactured by the high-end fashion firm Trovata, alongside items produced by the clothing retail chain Forever 21. It is easy to see that the items are all but identical. In fact, Trovata sued Forever 21 for copying these items (Odell 2009). However, the lawsuit, which continued for two years, was eventually settled out of court. This may not be surprising, given the failure of numerous lawsuits against Forever 21 and other US firms that have copied fashion designs (Hemphill and Suk 2009). The reason for these failures is that in the US there is no legal protection against design piracy of fashions: a situation in which a firm creates a copy or knockoff of another firm’s design (not its logo or brand identity, which are legally protected). Because of its possible impact to the US fashion industry, and due to its increasing ubiquity, design piracy has drawn much attention and lobbying effort from US fashion industry groups and has become a major issue for public policy makers (Raustiala and Sprigman 2012). It has also drawn much attention in the global fashion market, as the use of quick imitation in designs has become a flourishing industry in various countries. In particular, known actors such as Zara and H&M rely on imitations as part of their core strategy and could be substantially affected by changes in the legal status of design piracy (Weller 2007; West 2011). In the past years, seven separate bills that would protect fashion items from design piracy (mainly via a legal protection period, such as that instituted in the EU) were introduced in the US Congress; however, none of them has been approved (Ellis 2010, Riordan 2013). Design piracy has been a subject of active debate not only among legislators but also in the business and academic literature, and in particular in the academic legal literature (Barnett 2005; Cotropia and Gibson 2010; Hemphill and Suk 2009; Raustiala and Sprigman 2006). Interestingly, scholars in this field have emphasized not only the harm but also the possible benefits of knockoffs, suggesting that, in fact, knockoffs may help the industry to flourish (Barnett 2005; Raustiala and Sprigman 2012). Looking from the point of view of the firm that introduces the original design, and of the industry in general, the question boils down to the extent to which the drawbacks of a product’s design being copied outweigh any benefits it may create. Marketing Science Institute Working Paper Series 3 It is notable that much of the debate regarding how knockoffs may benefit or harm original designers has been based on anecdotes and conceptual arguments and not on empirical analysis of the financial consequences of design piracy. It would seem that marketing knowledge and formal approaches related to product growth and profitability are very relevant for this discussion, yet they are largely not part of it. In particular, such approaches could provide concrete insight into the effect of uniqueness on the dynamic demand for an original design following the entry of a knockoff, an effect that has received limited consideration thus far. Recent research strongly supports the idea that for many products, and fashions in particular, consumers’ need for uniqueness plays a significant role in their adoption and attrition decisions (Berger and Heath 2007, 2008; Chan, Berger, and van Boven 2012; Cheema and Kaikati 2010) and consequently aggregate market demand (Amaldoss and Jain 2005; Bakshi, Hosanagar, and Van den Bulte 2011; Berger and Le Mens 2009; Joshi, Reibstein, and Zhang 2009). Thus, even if consumers cannot differentiate between a copy and the original design, the mere presence of more items in the market will affect the degree to which consumers perceive a design as unique and so can create monetary harm to the original product. Our aim here is to contribute to the on-going discussion on this issue by exploring, using a formal analysis based on new product growth modeling, the monetary consequences caused by design piracy to the original items that are copied (hereafter referred to as “originals”). We consider the case of an original new fashion product that is introduced to the market, and what happens to the value of the cash stream from the growth process when a knockoff product is introduced at the same time. We look at three main factors that drive the effect of the knockoff.